Volume 98 Issue 2 Article 12 2019
Digital Platforms and the Leverage Problem
Digital Platforms and the Leverage Problem
Patrick F. Todd
Herbert Smith Freehills LLP
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Patrick F. Todd, Digital Platforms and the Leverage Problem, 98 Neb. L. Rev. 486 (2019) Available at: https://digitalcommons.unl.edu/nlr/vol98/iss2/12
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Digital Platforms and the Leverage
Problem
ABSTRACT
Antitrust policy towards firms that “leverage” their market power to grant themselves competitive advantages in adjacent markets has come to the fore in recent times with the growth of digital platforms in sec-tors such as online search, mobile operating systems, online market-places and social media. This Article analyzes the historical origins and Chicago critique of the leverage doctrine and how these informed the development of antitrust policy. Antitrust law currently distin-guishes between pro- and anti-competitive leveraging in order to achieve the optimal balance between promoting competition in adja-cent markets and preserving the legitimate ability of platform owners to enter and compete in adjacent markets. Thus, leveraging is only un-lawful under the Sherman Act when it results in consumer harm. The Article then considers recent proposals to address perceived competi-tion issues in digital platform markets, which condemn leveraging even if it benefits consumers in order to protect competitors in adjacent markets from competition on the merits. Empirical criteria that have been present in comparable instances of such intervention, such as bot-tleneck power over distribution, widespread harm to adjacent market competition, static product boundaries, and a lack or unimportance of integrative efficiencies, are not satisfied in the current context. Absent some proof that they are, the consumer welfare framework under anti-trust law should prevail without recourse to more intrusive intervention.
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* Trainee Solicitor, Herbert Smith Freehills LLP, London. The views expressed in this Article represent the author’s personal views and do not necessarily re-present the views of Herbert Smith Freehills LLP or its partners or clients. Her-bert Smith Freehills LLP represents or has represented companies mentioned in this Article, but no such client reviewed or commented on the manuscript prior to publication. This Article received no funding. The author alone is responsible for any errors or omissions. The author is grateful for comments on a later draft from Joshua Wright and three anonymous reviewers, and on earlier drafts from Hal Singer, Filippo Lancieri, Friso Bostoen, and Dirk Auer. The author is also grate-ful to the editors of the Nebraska Law Review for their careful and considered work on this Article’s manuscript.
TABLE OF CONTENTS
I. Introduction . . . 487
II. Leveraging by Digital Platform Owners . . . 493
A. Leveraging Concerns in Digital Markets . . . 493
B. Examples . . . 496
1. Online Search . . . 496
2. Mobile Operating Systems . . . 497
3. Online Marketplaces . . . 500
4. Social Media . . . 502
III. Leveraging in Antitrust Law . . . 504
A. The Historical Origins of the Leverage Doctrine . . . . 504
B. The Chicago Critique of the Leverage Doctrine . . . 506
C. The Impact of the Chicago Critique on Adjacent Market Entry and Leveraging . . . 508
D. Efficiency Justifications that Benefit Consumers . . . 514
1. Efficiencies from Adjacent Market Entry . . . 515
2. Efficiencies from Leveraging . . . 517
E. Distinguishing Anti-Competitive from Pro-Competitive Leveraging . . . 519
IV. Abrogating Consumer Welfare in Favor of Small Business Welfare . . . 522
A. Proposals to Regulate Adjacent Market Competition . . . 524
1. Structural Separation . . . 524
2. Non-Discrimination Principles . . . 525
3. Burden Reallocation . . . 527
B. Empirical Criteria for Abrogating Consumer Welfare . . . 529
1. Strategic Bottleneck Power . . . 529
2. Widespread Harm in Adjacent Markets . . . 533
3. Static Product Boundaries . . . 535
4. Lack or Unimportance of Integration Efficiencies . . . 538
V. Conclusion . . . 540
I. INTRODUCTION
In June 2017, the European Commission (EC) fined Google C= 2.4 billion for “leverag[ing] its market dominance in general internet search into a separate market, comparison shopping.”1 At the time,
1. European Commission Press Release IP/17/1785, Antitrust: Commission Fines Google C= 2.42 Billion for Abusing Dominance as Search Engine by Giving Illegal Advantage to Own Comparison Shopping Service (June 27, 2017).
this was the largest fine ever imposed in an antitrust case.2 One year later, the EC smashed its own record, fining Google a further C= 4.34 billion for licensing its mobile applications to device manufacturers using Google’s Android operating system (OS) in a single bundle.3 Across the globe, there have been fresh calls to investigate the activi-ties of Google and other tech firms, such as Apple, Facebook, and Am-azon (together, GAFA), in multiple lines of business that are adjacent to their core business models.4 A fear pervades that, once these firms have entered particular adjacent markets, they will favor their own adjacent offerings to the competitive detriment of their competitors. What links these cases, investigations, and accusations is the doctrine of leverage.
Leverage occurs when a firm exploits its monopoly power in one market in order to extend that power to an adjacent market, subse-quently exercising market power in that market by raising prices or restricting output or quality.5 Leverage, in antitrust circles, has evolved into a term of art and is distinguishable from conduct that suppresses competition in the already-dominated market.6 By defini-tion, leverage involves “the establishment of a new or second monop-oly.”7 In the context of digital platforms, leveraging has come to
2. Google strongly contests the merits of the case. See Case T-612/17, Google and Alphabet v. Comm’n, 2017 E.C.R. C 369/37.
3. Council Regulation 1/2003, 2018, (AT.40099) (EC) (Google Android) (July 18, 2018) [hereinafter Android Decision].
4. See, e.g., Letter from Orrin G. Hatch, U.S. Sen., to Joseph Simons, Chairman, Fed. Trade Comm’n (Aug. 30, 2018), https://www.hatch.senate.gov/public/cache/ files/5935a818-76c5-4ad6-ab29-51241b9a8a83/2018.08.30%20Senator%20Hatch %20Letter%20to%20FTC%20Chairman%20Simons.pdf (urging “the Federal Trade Commission (FTC) to reconsider the competitive effects of Google’s conduct in search and digital advertising.”); Makena Kelly, Google Under Antitrust Inves-tigation by 50 Attorneys General, THE VERGE (Sept. 9, 2019), https://www
.theverge.com/2019/9/9/20857440/google-antitrust-investigation-attorneys-gener al-advertising-search [https://perma.unl.edu/C54A-R9AZ].
5. See, e.g., Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611 (1953) (holding that “monopolistic leverage” occurs when “a seller exploits his dominant position in one market to expand his empire into the next”); Louis Kaplow, Exten-sion of Monopoly Power Through Leverage, 85 COLUM. L. REV. 515, 516 (1985)
(“Traditional leverage theory claims that a monopolist’s use of its power in its own market to control activities in another market typically represents an at-tempt to spread its power to the other market.”); Robin Cooper Feldman, Defen-sive Leveraging in Antitrust, 87 GEO. L.J. 2079, 2081 (1999) (“Leverage occurs
when a monopolist uses power in one market to induce or foreclose sales in an-other market and thereby monopolize both”). Use of the term “adjacent market” is intended to mean a line of business that is complementary to the platform owner’s core offering and is not intended to represent that the line of business constitutes a separate market for the purpose of market definition.
6. Cf. Ward S. Bowman, Tying Arrangements and the Leverage Problem, 67 YALE
L.J. 19 (1957) (distinguishing “leverage as a revenue-maximizing device and lev-erage as a monopoly-creating device.”).
encompass a wide variety of conduct. Examples include platform own-ers promoting their own adjacent offerings in search result pages, bundling or pre-installing their adjacent offerings with platform software code, shutting off access to Application Programming Inter-faces (APIs) or data to third parties, or generally reducing the compat-ibility of third-party offerings with the platform as a means of distribution. This Article uses the term “leveraging” to encompass any form of conduct that makes it harder for third-parties to distribute their products or services through a platform, while benefitting the platform owner’s competing product.
Importantly, leverage is not a standalone theory of abuse in anti-trust law. It is better thought of as a category that encompasses nu-merous legal theories of harm, such as tying and refusals to deal, where the conduct’s competitive effects are felt in a market distinct from the one in which the defendant is said to be dominant.8 Leverag-ing is distinct from adjacent market entry or “vertical integration,” which denotes the mere presence of a firm in multiple related or com-plementary markets, rather than dealing in the production or use of the complementary product at arm’s length through the price system.9 Leverage, on the other hand, is the act of distorting competition in the adjacent market by, through various means, exploiting market power in the primary market. However, adjacent market entry and leverag-ing are inherently linked due to the belief held by some that the for-mer begets the latter.
Due to the historic development of the leverage doctrine, the term “leverage” has negative connotations and is often associated with con-duct that has no effect or purpose apart from the suppression of com-petition. However, a significant insight of the Chicago School of antitrust analysis was that monopolists often leverage in order to pro-vide consumers with better products or lower prices. Though some as-pects of the Chicago critique stand rebutted by so-called “Post-Chicago” insights, its fundamental contribution—that leveraging is predominantly pro-competitive and benefits consumers—remains
vi-8. See infra note 115; ROBERT O’DONOGHUE & JORGE PADILLA, THE LAW AND E CO-NOMICS OF ARTICLE 102 TFEU 153 (2d ed., 2013) (“Leveraging is not an
indepen-dent ground of abuse [in EU competition law]. It is simply a convenient (and sometimes misleading) label to identify cases that have in common the feature that a dominant firm uses its power on one market to commit an abuse that has effects in an adjacent . . . market.”).
9. This Article prefers the term “adjacent market entry” to describe production that takes place inside the boundaries of the firm, rather than vertical integration, which implies participation in “more than one successive stage of the production or distribution of goods or services.” SeeDENNIS W. CARLTON & JEFFREY M.
PERLOFF, MODERN INDUSTRIAL ORGANIZATION 395 (4th ed.). For further discussion
on why the term “vertical integration” is a misnomer in certain situations, see Bruce M. Owen, Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access, 38 REV. INDUS. ORG. 363 (2011).
tal when considering the behavior of platform firms in the digital economy. Consumers often benefit from adjacent market entry and leveraging by dominant firms because those firms can use their ex-isting positions to provide better quality or lower prices that they are uniquely placed to provide. This does not mean that leveraging is or should be per se legal. Under the existing regime, it is possible to tackle anti-competitive leverage while condoning behavior that consti-tutes competition on the merits.
However, some scholars believe that the entry by large digital plat-form firms into lines of business adjacent to their core offerings is giv-ing rise to competition problems that are beyond the reach of the existing antitrust toolbox, including the leveraging of market power.10 These scholars suggest that the growth of GAFA has led to a concomi-tant decrease in innovation and investment by firms that distribute their goods and services (digital or otherwise) through these firms’ platforms.
In response, some scholars have suggested that platform owners should face a higher (or claimant firms a lower) burden of proof when leveraging complaints are brought.11 Others suggest a regulatory framework to complement antitrust law in the form of a “non-discrimi-nation” standard, which would altogether prevent vertically-inte-grated platform firms from tying, bundling, integrating, or otherwise privileging their own adjacent products (despite the efficiencies that this conduct may produce).12 Others, notably the Neo-Brandeisians (so-called in homage to Justice Louis Brandeis, an early and famous exponent of “small-business welfare”), view any adjacent market entry by dominant firms as inherently concerning because those firms are more likely than not to subsequently leverage their market power to exclude rivals in the adjacent markets, thus anti-competitively spreading their tentacles across multiple markets ‘til kingdom come.13
10. Other issues include privacy concerns raised by data-collection, excessive concen-tration in certain markets and the impact of digital platforms on news consumption.
11. Jacques Cr´emer, Yves-Alexandre de Montjoye & Heike Schweitzer, Competition Policy for the Digital Era, EUR. COMM’N, 1, 42 (2019) [hereinafter EC Digital
Competition Report]; STIGLER CENTER COMMITTEE FOR THE STUDY OF DIGITAL
PLATFORMS, MARKET STRUCTURE AND ANTITRUST SUBCOMMITTEE, REPORT 77
(2019) [hereinafter STIGLER] (suggesting that “the proof requirements imposed
upon antitrust plaintiffs [are relaxed or reversed] in appropriate cases”). 12. See Kevin Caves & Hal Singer, When the Econometrician Shrugged: Identifying
and Plugging Gaps in the Consumer Welfare Standard, 26 GEO. MASON L. REV.
(2019); Frank A. Pasquale, Internet Nondiscrimination Principles: Commercial Ethics for Carriers and Search Engines, 2008 U. CHI. LEGAL F. 263 (2008)
(advo-cating neutrality principles for search engines).
13. Lina M. Khan, The Separation of Platforms and Commerce, 119 COLUM. L. REV.
973 (2019) (proposing structural separation between platforms and adjacent ser-vices); TIM WU, THE MASTER SWITCH: THE RISE AND FALL OF INFORMATION E
M-Neo-Brandeisians would solve this by blocking dominant firms from entering into adjacent markets. This Article posits that all three of these proposals, to varying degrees, would abandon the interests of consumers in favor of less efficient small businesses, at the expense of consumer welfare.
Meanwhile, regulators across the globe are paying close attention to antitrust’s leverage problem. In 2018 and early 2019, the U.S. Fed-eral Trade Commission (FTC) held a series of hearings on Competition and Consumer Protection in the twenty-first century, which included a discussion of exclusionary conduct in digital markets.14 In July 2019, the U.S. Department of Justice (DOJ) announced that it had launched a review of digital platforms, including how they purportedly achieved market power and whether they “are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers.”15 In the European Union (EU), the EC held a conference and commissioned the production of a report to examine competition policy in the digital era in early 2019.16 Also in 2019, the Australian competition authority published a final report containing a series of recommendations aimed at leveraging in digital markets.17 Finally, in the United Kingdom (UK), a panel chaired by Jason Furman recommended a series of changes and updates required for antitrust law to operate effectively in digital markets (the Furman In-quiry Report).18 This spurred the launch by the UK Competition and Markets Authority (CMA) of a digital markets strategy, including the
PIRES (2010) (describing these controls on adjacent market entry as the
“Separations Principle”). See alsoMARSHALL STEINBAUM & MAURICE E. STUCKE, THE EFFECTIVE COMPETITION STANDARD: A NEW STANDARD FOR ANTITRUST 33
(2018) (“To prevent monopolies and monopsonies from leveraging their power across markets, the [effective competition] standard would prohibit their vertical integration into other markets, where the integration may foster the monopolist’s or monopsonist’s ability and incentives to distort competition.”). For further back-ground on the Neo-Brandeisian movement, see Lina M. Khan, The New Brandeis Movement: America’s Antimonopoly Debate, 9 J. EUR. COMPETITION L. & PRAC.
131 (2018); TIM WU, THE CURSE OF BIGNESS: ANTITRUST IN THE NEW GILDED AGE
127–39 (2018) (setting out a “Neo-Brandeisian agenda”).
14. Hearings on Competition and Consumer Protection in the 21st Century, FED.
TRADE COMM’N, https://ftc.gov/policy/hearings-competition-consumer-protection [https://perma.unl.edu/7XDP-RYKM] (last visited June 23, 2019).
15. Press Release, U.S. Dep’t of Justice Antitrust Division, Justice Department Re-viewing the Practices of Market-Leading Online Platforms (July 23, 2019), https:/ /www.justice.gov/opa/pr/justice-department-reviewing-practices-market-leading-online-platforms [https://perma.unl.edu/E6MY-6YKE].
16. EC Digital Competition Report, supra note 11.
17. AUSTL. COMPETITION & CONSUMER COMM’N, DIGITAL PLATFORMSINQUIRY (2019). 18. UK DIGITAL COMPETITION EXPERT PANEL, UNLOCKING DIGITAL COMPETITION
opening of a market study into digital platforms.19 This Article aims to contribute to the discussion surrounding platform owners’ activities in adjacent markets, a focal point of policymakers’ deliberations.
This Article proceeds as follows. Part II briefly discusses the rise of digital platforms and the conduct that critics deplore and places the debate in context by describing the activity of platform owners active in online search, mobile operating systems, online marketplaces, and social media. Part III provides a brief overview of the historical devel-opment of the leverage doctrine, focusing on U.S. courts’ aversion to vertical integration and tying arrangements, for which the leverage doctrine formed the basis. It then analyzes the critique of the leverage doctrine by scholars associated with the University of Chicago, con-cluding that the fundamental contribution of the Chicago critique— that leveraging is predominantly beneficial to consumers—is still rele-vant today. Thus, antitrust law currently distinguishes pro- from anti-competitive leverage in order to achieve the optimal balance between promoting competition in adjacent markets and preserving the legiti-mate ability of dominant firms to enter and compete in adjacent mar-kets. Part IV examines the proposals put forward by the scholars who criticize digital platform firms, including those advocating structural separation, those calling for non-discrimination regulation, and those proposing a recast antitrust law under which dominant firms bear a higher burden of proof. As we shall see, these proposals, to varying degrees, abrogate consumer welfare in favor of “small business wel-fare” and would sweep the rug from under the existing framework that, some would argue, already strikes the correct balance between the ability of dominant firms to enter adjacent markets and the sur-vival of small businesses in those markets. Ultimately, the recommen-dations of these scholars depend on empirical criteria that have not been verified, including platform owners’ strategic bottleneck power over distribution in adjacent markets, evidence of widespread compet-itive harms in adjacent markets, discernible product boundaries, and an unimportance or relative infrequency of integrative efficiencies that benefit consumers. Unless these criteria are empirically verified, the status quo, which considers the benefits consumers receive from leveraging and adjacent market entry, should prevail.
This Article focuses largely on the position in the U.S. However, it is useful where appropriate to draw on cases and commentary from the EU and other jurisdictions where there has been more enforce-ment in recent times.
19. Press Release, Competition & Markets Authority, CMA Launches Digital Mar-kets Strategy (July 3, 2019), https://www.gov.uk/government/news/cma-launches-digital-markets-strategy [https://perma.unl.edu/2G2L-ZSYS].
II. LEVERAGING BY DIGITAL PLATFORM OWNERS A. Leveraging Concerns in Digital Markets
Firms operating in the digital economy often operate platforms composed of software code that connect users in a single group to each other, or users in one group to users in other groups.20 The “network effects” that characterize platform markets can lead to rapid horizon-tal growth and, all else equal, a single firm that serves as the standard for all users to settle on.21 As a result, in the real world platform mar-kets are frequently concentrated with a few firms serving consumer demand. Platform operators also often grow vertically by adding new features to their platforms to make them more attractive to users (and, where applicable, third-party distributors). This is especially true when platform markets are in their incipiency: a diligent plat-form firm will enter adjacent markets to attract users to the platplat-form, which will then attract third parties to distribute their products through the platform, which will in turn attract more users, and so on. This can serve to solve the so-called “chicken-and-egg” problem that bedevils nascent platform business models.22 For a platform to sur-vive, it must be attractive to both consumers and third-party distribu-tors; thus, hampering innovation within the platform ecosystem could destroy the platform value entirely.23 Choosing to enter a complemen-tary line of business already served by third-parties is therefore a complex strategic decision for any platform owner, fraught with trade-offs. Nonetheless, scholars have concluded that platform owners predominantly have the incentive to encourage innovation by produc-ers of complements, as this increases platform value.24
However, once a particular platform market matures, third-party producers can theoretically become reliant on the platform to dis-tribute their products. Some scholars are critical of GAFA’s practice of entering adjacent lines of business served by independent vendors and leveraging the popularity of their platforms to direct consumers
to-20. See, e.g., Richard Schmalensee & David S. Evans, Markets with Two-Sided Plat-forms,in 1 ISSUES IN COMPETITION L. AND POL’Y 667 (2009).
21. SeeMichael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. ECON. PERSP. 93 (1994).
22. See Andrei Hagiu & Daniel Spulber, First-Party Content and Coordination in Two-Sided Markets, 59 MGMT. SCI. 933, 935 (2013) (finding that the provision by
platforms of first-party content “enable[s] platforms facing unfavorable expecta-tions to compensate for their difficulty in attracting third-party sellers.”). 23. Annabelle Gawer & Rebecca Henderson, Platform Owner Entry and Innovation
in Complementary Markets: Evidence from Intel, 16 J. ECON. & MGMT. STRATEGY
1, 2 (2007).
24. Joseph Farrell & Philip J. Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the In-ternet Age, 17 HARV. J.L. & TECH. 85 (2003).
wards their own adjacent offerings. As Lina Khan, a vocal critic of digital platform owners, writes:
[P]latforms not only serve as critical infrastructure, but are also integrated across markets. This enables a platform to leverage its platform dominance to establish a position in a separate or ancillary market. By placing a platform in direct competition with the firms using its infrastructure, this form of integra-tion also creates a core conflict of interest, incentivizing a platform to privilege its own goods and services over those offered by third parties.25
This concern has been characterized as one entity serving as both “player” and “referee” on the platform. Allegedly, this dual role creates an irreconcilable misalignment between the interests of users, third party distributors, and the platform owner itself. Margrethe Vestager, European Competition Commissioner, has described how firms that act as “both player and referee, competing with others that rely on the platform, but also setting the rules that govern that competition,” is “one of the biggest issues we face.”26 Elizabeth Warren, who has ar-gued in favor of breaking GAFA up as part of her presidential cam-paign, claims that “you don’t get to be the umpire and have a team in the game.”27 Despite its vague, somewhat rough-hewn application to real-world scenarios, the player-referee paradigm has picked up steam as a digestible appellation that ostensibly sums up the leveraging is-sue. Going forward, it is important that all sides of the debate have a firm grasp on the law and economics of leverage, so that the player-referee label of the twenty-first century does not befall the same fate as “leverage” did in the preceding century.
While this Article takes as given the presence of a platform owner in one or more adjacent markets, much of the debate revolves around
whether that firm should be able to enter the adjacent market in the first place, either through natural growth or merger. Thus, while this Article focuses on single-firm conduct under § 2 of the Sherman Act (and its European counterpart, Article 102 of the Treaty on the
Func-25. Lina M. Khan, What Makes Tech Platforms So Powerful?, PRO-MARKET (Apr. 5,
2018), https://promarket.org/makes-tech-platforms-powerful/ [https://perma.unl .edu/HZ4W-B8CD]. See also Lina M. Khan, The Ideological Roots of America’s Market Power Problem, 127 YALE L.J.F. 960, 961 (2018) (arguing that “a few
tech-nology platform companies mediate a rapidly growing share of our commerce and communications” and that “these firms leverage their platform power into new lines of business, extending their dominance across sectors.”).
26. Margrethe Vestager, Competition and the Digital Economy, speech at Associa-tion of European CompetiAssocia-tion Law Judges Annual Conference (June 6, 2019). 27. Alexander C. Kaufman, Elizabeth Warren on Breaking up Amazon: ‘You Don’t
Get To Be The Umpire And Have A Team’, HUFF. POST (Apr. 22, 2019), https://
www.huffpost.com/entry/elizabeth-warren-tech-amazon_n_ 5cbe6120e4b00b3e70 ce32b8 [https://perma.unl.edu/A9EH-4K3P]. See also Elizabeth Warren, Here’s How We Can Break up Big Tech, MEDIUM (Mar. 8, 2019), https://medium.com/
@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c [https://perma .unl.edu/H447-G9DJ], at 4 (proposing a prohibition on “owning both the platform utility and any participants on that platform.”).
tioning of the European Union (TFEU)), the conclusions drawn in re-sponse to various policy proposals will axiomatically have important consequences for merger control policy. Indeed, for those acquisitions by platform owners that have been scrutinized, leveraging has been a key theory of harm. For example, the DOJ considered a leveraging theory of harm when it investigated Google’s acquisition of Admeld in 2011.28 In the EU, leveraging concerns prompted the EC to extract commitments from Microsoft when it acquired LinkedIn.29 The EC also considered leveraging theories of harm when it investigated Ap-ple’s acquisition of Shazam.30
Leveraging underpins past, present, and future merger cases, es-pecially in digital markets. One oft-cited statistic is that GAFA (plus Microsoft) have together acquired over 400 businesses in the past dec-ade (although it is also widely accepted that the vast majority of these acquisitions have been presumptively pro-competitive).31 For exam-ple, there is a growing concern that Facebook should not have been allowed to acquire Instagram or WhatsApp or Google to acquire Waze.32 The Furman Inquiry Report concluded that merger control in
28. Press Release, Dep’t of Justice Antitrust Division, Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigation of Google Inc.’s Acquisition of Admeld Inc. (Dec. 2, 2011), https://www.justice.gov/opa/pr/ statement-department-justices-antitrust-division-its-decision-close-its-investiga-tion-google [https://perma.unl.edu/9ATJ-KXKC] (noting that the investigation evaluated whether the acquisition would “enable Google to extend its market power in the Internet search industry to online display advertising through an-ticompetitive means.”).
29. Commission Decision, Case M.8124 (Microsoft/LinkedIn) (Dec. 6, 2016), at ¶ 301 (investigating whether “the combination of LinkedIn’s [professional social net-work (PSN)] services with Microsoft’s PC-based OSs and productivity software could lead the merged entity to leverage its strong market position from the mar-kets for PC-based OSs and for productivity software to the market for PSN ser-vices.”). To clear the merger, Microsoft made a series of commitments for a period of five years. See ¶¶ 409–21.
30. Commission Decision, Case M.8788 (Apple/Shazam) (Sept. 6, 2018), at ¶ 274 (considering whether Apple would have the incentive to leverage its “position from music recognition apps to the markets for digital music streaming apps” by, for example, “denying or degrading access of competing providers of digital music streaming apps to Shazam’s referral mechanism” or whether the Apple would have the incentive to integrate “Shazam’s music recognition functionalities within the Apple Music apps, and at the same time [deny] similar levels of inte-gration to competing providers of digital music streaming apps.”). Ultimately, the EC cleared this merger without imposing conditions. Id. at ¶ 349.
31. See, e.g., Furman Inquiry Report, supranote 18, at 91–92 (“In the last decade, Amazon, Apple, Facebook, Google, and Microsoft combined have made over 400 acquisitions globally . . . The Panel recognises that the large majority of the ac-quisitions by large digital companies in recent years have likely been benign or beneficial for consumers.”).
32. Tim Wu & Stuart A. Thompson, The Roots of Big Tech Run Disturbingly Deep, N.Y. TIMES (June 7, 2019), https://www.nytimes.com/interactive/2019/06/07/opin
digital markets “needs a reset” and that “the CMA should take more frequent and firmer action to challenge mergers that could be detri-mental to consumer welfare through reducing future levels of innova-tion and competiinnova-tion”.33 This debate is a subset of wider dissension concerning appropriate levels of vertical merger enforcement gener-ally.34 Though this Article focuses on the scrutiny of platform owners that are already active in adjacent markets, it is important to bear in mind that the policy proposals examined herein also have ramifica-tions for vertical merger policy.
B. Examples
To place the debate surrounding adjacent market entry and lever-aging in the digital economy in its proper context, what follows is a broad overview of practices engaged in by digital platform owners in various online markets, such as online search, mobile operating sys-tems, online marketplaces, and social media, that are the subject of criticism.35
1. Online Search
Google runs a general internet search engine (Google Search), which accounts for a significant proportion of internet users’ internet searches across the globe. As well as running a general internet search engine, Google has also entered several complementary lines of business, such as mapping services (Google Maps), comparison shop-ping services (Google Shopshop-ping), online job listings, and comparison flight services (Google Flights). Google’s rivals in these ancillary lines of business complain that Google leverages the popularity of its gen-eral internet search engine to grant itself competitive advantages to its ancillary services. Specifically, Google allegedly grants prominent display to its adjacent services within its search results pages, which renders links to rival websites less visible to users, resulting in more users clicking on the former, rather than the latter. In 2017 the EC found that this behavior, in the context of comparison shopping ser-vices, violated Article 102 TFEU.36 Similar complaints have been
86T7-4KRL]; Daniel Trotta, Wall Street Critic Warren Vows to Break up Amazon, Facebook, Google, REUTERS (Mar. 8, 2019),
https://uk.reuters.com/article/uk-usa-election-warren-idUKKCN1QP1M2 [https://perma.unl.edu/5TXP-JMD9]. 33. Furman Inquiry Report, supra note 18, at 93.
34. See, e.g., Steven C. Salop, Invigorating Vertical Merger Enforcement, 127 YALE
L.J. 1962 (2018) (proposing more stringent vertical merger enforcement). 35. The following discussion does not make any representations as to the dominance
of the platform owners in their respective platform markets, but merely serves to exemplify the wide practice of adjacent market entry and leveraging by platform firms that have been the subject of criticism.
36. Council Regulation 1/2003, 2017 (AT.39740) (EC) [hereinafter Google Shopping];
lodged in relation to Google’s job listings37 and local reviews.38 How-ever, the FTC closed a similar investigation in 2013, reasoning that Google’s product designs were adopted “to improve the quality of its search results” and that “any negative impact on actual or potential competitors was incidental to that purpose.”39 This is because inte-grating specialized search results with the general search results pages provides users with richer content more quickly, economizing on user search costs.40 In June 2019, it was reported that the DOJ was readying an investigation into Google, although the specific busi-nesses and conduct under review are not yet known.41 In September 2019, fifty attorneys general announced that they had launched an investigation into Google’s advertising and search businesses.42
2. Mobile Operating Systems
Apple and Google produce popular mobile operating system plat-forms, respectively iOS and Android, and also produce applications that “sit on top of” those platforms. These applications include music streaming (Apple Music), mapping services (Apple Maps/Google Maps), and web-browsing (Safari/Google Chrome). Apple and Google,
Natural Remedy to Google’s Monopoly Leveraging Abuse, 1 EUR. COMPETITION &
REG. L. REV. 208 (2017) (characterizing Google’s conduct as a form of leveraging).
37. Klaus Lauer & Douglas Busvine, Google’s German Jobs Product Anti-competitive, Says Springer Unit, REUTERS (June 6, 2019),
https://uk.reuters.com/article/uk-eu- google-antitrust-axel-sprngr/googles-german-jobs-product-anti-competitive-says-springer-unit-idUKKCN1T71RM [https://perma.unl.edu/9WWM-GQ2P]; Jon Porter,Google’s Job Search Tool Faces Complaints from Rivals in Europe, THE
VERGE (Aug. 13, 2019),
https://www.theverge.com/2019/8/13/20803799/google-eu-ropean-union-job-listing-tool-sites-complaint-competition-commission [https://per ma.unl.edu/BTR6-WPJE].
38. Rochelle Toplensky & Hannah Kuchler, Yelp Files New EU Complaint Against Google Over Search Dominance, FIN. TIMES (May 22, 2018), https://www.ft.com/
content/42ac9192-5dd2-11e8-ad91-e01af256df68 [https://perma.unl.edu/CM7G-3SQ7].
39. Statement of the Fed. Trade Comm’n Regarding Google’s Search Practices, In the Matter of Google Inc., FTC File Number 111-0163 (Jan. 3, 2013) [hereinafter FTC Google Statement]. In November 2018, the Brazilian competition authority closed its investigation into Google’s search practices, reasoning that there was a lack of evidence that Google’s conduct negatively affected competition comparison shop-ping services and that users nevertheless benefitted from Google’s conduct. See
Press Release, Conselho Administrativo de Defesa Econˆomica, Superintendˆencia-Geral Recomenda Arquivamento de Investiga¸c ˜ao Contra o Google (Nov. 20, 2018), http://www.cade.gov.br/noticias/superintendencia-geral-recomenda-arquivamen to-de-investigacao-contra-o-google [https://perma.unl.edu/J5PY-B5X9].
40. See also John M. Yun, Understanding Google’s Search Platform and the Implica-tions for Antitrust Analysis, 14 J. COMPETITION L. & ECON. 311 (2018).
41. Brent Kendall & John D. McKinnon, Justice Department Is Preparing Antitrust Investigation of Google, WALL ST. J. (June 1, 2019), https://www.wsj.com/articles/
justice-department-is-preparing-antitrust-investigation-of-google-11559348795 [https://perma.unl.edu/MUP4-Q8SZ].
through various ways and means, bundle their apps with their software platforms or with other apps. Some allege that this behavior stifles competition in the app markets because users exhibit bias to-wards default options (and having to reach consumers through an app store is a much less efficient means of reaching consumers). In June 2018, the EC found that Google illegally leveraged between various mobile application markets by tying some of its Android applications together in a bundle.43 Specifically, smartphone manufacturers could not pick and choose between the likes of the Google Play application store, Google Chrome, or Google Search; if a manufacturer wanted to pre-install one app, it had to pre-install a whole suite of apps. One year later, the Competition Commission of India found that similar conduct amounted to “prima facie leveraging of Google’s dominance” in India.44
In a similar vein, Apple has been accused of leveraging the popu-larity of and its control over iOS to increase usage of its various adja-cent services. In April 2019, the Dutch competition authority announced that it had commenced an investigation into whether Ap-ple (potentially along with Google) abused a dominant position by “giving preferential treatment to its own apps.”45 Echoing the leverag-ing concerns explored so far, the Dutch authority found that “[o]n the one hand, Apple and Google have an interest in offering many differ-ent apps from app providers in their app stores. On the other hand, however, Apple and Google are app providers in their own right, too. So their apps compete with those of other market participants.”46 The authority poses that “[t]hese competing interests may pose antitrust problems.”47 Also in April 2019, two producers of parental control ap-plications filed a complaint with the EC alleging that Apple made it unduly difficult for them to distribute their software through Apple’s App Store, in order to preference Apple’s Screen Time functionality (which is integrated with its software platform).48
43. Android Decision, supra note 3.
44. Aditya Kalra, Exclusive: Google Appears to Have Leveraged Android Domi-nance–India Watchdog, REUTERS (June 28, 2019), https://www.reuters.com/arti cle/us-google-india-antitrust-exclusive/exclusive-google-appears-to-have-lever aged-android-dominance-india-watchdog-idUSKCN1TT1Q2 [https://perma.unl .edu/6PY6-TWNT].
45. Press Release, Authority for Consumers & Markets, ACM Launches Investiga-tion into Abuse of Dominance by Apple in Its App Store (Apr. 11, 2019), https:// www.acm.nl/en/publications/acm-launches-investigation-abuse-dominance-ap ple-its-app-store [https://perma.unl.edu/E2YQ-JH5U].
46. Id.
47. Id.
48. Press Release, Qustodio, Qustodio & Kidslox File a Complaint Against Apple with the European Commission over Abuse of Dominant Position (Apr. 30, 2019). Apple has since adjusted its policies so that parental control app developers can access technologies in iOS that allow them to operate. See Updates to the App
On the other hand, technically integrating various apps, which ne-cessitates tying them together in a bundle and, indeed, giving them “preferential treatment” relative to third-party apps, can generate ef-ficiencies that do not prevail if the apps are distributed on a standalone basis.49 As Carl Shapiro notes, “the boundary between the ‘platform’ and services running on that platform can be fuzzy and can change over time.”50 Moreover, platforms need to have rules that gov-ern the negative extgov-ernalities that certain users or third-parties exert on other users of the platform in order to maximize the value of the platform to all users.51 This can involve stymieing the compatibility of third-party applications with the platform itself. Apple, in a press re-lease following the parental control app complaint, stated that certain parental control apps “put users’ privacy and security at risk.”52 Apple has also invoked this sort of justification as a response to a complaint that Spotify, the music-streaming service, has made to the EC.53 Spo-tify claimed that Apple illicitly put SpoSpo-tify at a competitive disadvan-tage vis- `a-vis Apple’s own music streaming service within the iOS platform by levying a 30% commission on subscriptions to Spotify’s premium ad-free service, blocking certain upgrades to Spotify’s app, and locking Spotify out of Apple’s other ecosystems, such as Siri, HomePod, and Apple Watch.54 In response, Apple claimed that it only rejected Spotify’s app updates when they broke the App Store rules and that it had supported Spotify’s integration with Airplay 2 (the streaming technology used in the HomePod and Siri) and Apple Watch.55 Apple also denied that it takes a 30% cut of Spotify’s sales made through Apple’s platform, stating that it takes a 15% portion of subscription fees for less than 1% of Spotify’s subscribers.56
Store Review Guidelines, APPLE (June 3, 2019), https://developer.apple.com/news/
?id=06032019j [https://perma.unl.edu/S89Z-VL84]; Jack Nicas, Apple Backs off Crackdown on Parental-Control Apps, N.Y. TIMES (June 3, 2019), https://www.ny
times.com/2019/06/03/technology/apple-parental-control-apps.html [https://per ma.unl.edu/3AKT-A7TL] (last visited June 29, 2019).
49. See infra subsection III.D.2.
50. Carl Shapiro, Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets, 33 J. ECON. PERSPS. 69, 84 (2019).
51. David S. Evans, Governing Bad Behavior by Users of Multi-Sided Platforms, 27 BERKELEY TECH. L.J. 1201 (2012).
52. Press Release, Apple, The Facts About Parental Control Apps (Apr. 28, 2019), https://www.apple.com/newsroom/2019/04/the-facts-about-parental-control-apps/ [https://perma.unl.edu/32B4-FK4H].
53. Press Release, Spotify, Consumers and Innovators Win on a Level Playing Field (Mar. 13, 2019), http://newsroom.spotify.com/2019-03-13/consumers-and-innova tors-win-on-a-level-playing-field/ [https://perma.unl.edu/T3UA-KU92].
54. Id.
55. Press Release, Apple, Addressing Spotify’s Claims, http://apple.com/uk/news room/2019/03/addressing-spotifys-claims/ [https://perma.unl.edu/4ZHJ-FX9R]. 56. Jacob Kastrenakes, Apple Cites Irrelevant Spotify Subscription Stats in New
3. Online Marketplaces
Amazon is a popular platform that connects users and independent merchants. However, Amazon is also active in the supply of private label products (for example, its Amazon Basics range), and thus com-petes with its merchants in some product lines. In a popular article, Khan accuses Amazon of “cross-leverag[ing] market advantages across distinct lines of business” in ways that the current antitrust framework does not anticipate.57 The European Commission58 and Italian59 and Luxembourgish60 competition authorities are investigat-ing Amazon’s activity in this sphere. The German and Austrian au-thorities closed investigations into Amazon’s treatment of merchants in July 2019, after securing changes in Amazon’s terms of business with merchants.61 The Italian authority is investigating whether Am-azon discriminates against merchants that do not use AmAm-azon’s logis-tics services. Meanwhile, the EC is investigating whether Amazon is leveraging the sales data that it collects from its merchants to
privi-18715719/apple-spotify-eu-antitrust-complaint-response [https://perma.unl.edu/ N7EE-ZQ7N].
57. Lina M. Khan, Amazon’s Antitrust Paradox, 126 YALE L.J. 710, 717 (2017).
58. European Commission Press Release IP/42/91, Antitrust: Commission Opens In-vestigation into Possible Anti-Competitive Conduct of Amazon (July 17, 2019) [hereinafter EC Amazon Press Release]; see also Margrethe Vestager, Speech at CEPS Corporate Breakfast: Getting the Best out of Technology (Sept. 10, 2018) (“[S]ome platforms . . . might collect sensitive data about products that are sold by others through the marketplace. And they might use that data to boost their own sales of the same products, at the expense of sellers on the marketplace. So we’re looking right now to see if there is a real issue here under the competition rules.”).
59. Press Release, Autorit `a Garante della Concorrenza e del Mercato, Amazon: In-vestigation Launched on Possible Abuse of a Dominant Position in Online Mar-ketplaces and Logistic Services (Apr. 16, 2019), https://en.agcm.it/en/media/press-releases/2019/4/Amazon-investigation-launched-on-possible-abuse-of-a-domi nant-position-in-online-marketplaces-and-logistic-services [https://perma.unl .edu/3QPF-AJ98].
60. Press Release, Counseil de la Concurrence, Enquˆete sur les Services de Plateforme en Ligne (Apr. 2, 2019), https://concurrence.public.lu/dam-assets/fr/ actualites/2019/2019-4-1-Communique-services-en-ligne-.pdf [https://perma.unl .edu/L9DT-NXG2] [Google translation]. The exact conduct under investigation is not yet known, but the authority has invited submissions from retailers that dis-tribute through Amazon’s platform.
61. In Germany, see Press Release, Bundeskartellamt, Bundeskartellamt Obtains Far-reaching Improvements in the Terms of Business for Sellers on Amazon’s Online Marketplaces (July 17, 2019), https://www.bundeskartellamt.de/Shared Docs/Meldung/EN/Pressemitteilungen/2019/17_07_2019_Amazon.html [https:// perma.unl.edu/XUD9-NA6F] [hereinafter Bundeskartellamt Amazon Press Re-lease]. In Austria, see Press Release, Bundeswettbewerbsbeh¨orde, BWB in-formiert: Amazon ¨andert Gesch ¨aftsbedingungen (July 17, 2019), https://www .bwb.gv.at/news/detail/news/bwb_informiert_amazon_aendert_geschaeftsbeding ungen/ [https://perma.unl.edu/EQN8-XJGT] [Google translation].
lege its own offerings.62 When sellers transact with consumers through Amazon’s platform, Amazon accumulates the associated sales data and allegedly uses this data to determine which companies’ offer-ings appear in Amazon’s “Buy Box,” which is displayed prominently on Amazon. The EC alleges that the Buy Box “seems key for market-place sellers as a vast majority of transactions are done through it.”63 The FTC is rumored to be gearing up for an investigation into Ama-zon’s business practices, too.64 The specific conduct to be scrutinized is unknown, although Joseph Simons, chairman of the FTC, has stated that Amazon’s favoring of its own products in search results rankings may be “problematic.”65
Of course, if Amazon’s products (or whichever firm’s products are displayed most prominently to users) are cheaper or better than those of rival firms, there is no tractable consumer harm. But critics allege that Amazon’s conduct may have negative effects in the long run be-cause dependence on Amazon for distribution may no longer be a via-ble business model.66 On the other hand, it is prima facie in Amazon’s interests to have as many merchants distributing through Amazon as possible, as this increases the value of Amazon as an e-commerce plat-form. The share of sales that independent merchants account for on its platform has increased from 30% in 2008 to 58% in 2018, which Ama-zon puts down to its investment in “the very best selling tools [it] could imagine and build” for independent merchants.67 Notably, in April 2019 Amazon redesigned its platform interface so that certain
promi-62. EC Amazon Press Release, supranote 58. 63. Id.
64. Tony Romm, Amazon Could Face Heightened Antitrust Scrutiny Under a New Agreement Between U.S. Regulators, WASH. POST (June 1, 2019), https://www
.washingtonpost.com/technology/2019/06/02/amazon-could-face-heightened-anti trust-scrutiny-under-new-agreement-between-us-regulators/ [https://perma.unl .edu/D6UR-PBMF].
65. Richard Waters, US Regulator Says Amazon Search Algorithm May Be ‘Problem-atic’, FIN. TIMES (Sept. 17, 2019),
https://www.ft.com/content/b724374c-d99a-11e9-8f9b-77216ebe1f17 [https://perma.unl.edu/VB9W-EERR]. For further back-ground on this allegation, see Dana Mattioli, Amazon Changed Search Algorithm in Ways That Boost Its Own Products, WALL ST. J. (Sept. 16, 2019), https://www
.wsj.com/articles/amazon-changed-search-algorithm-in-ways-that-boost-its-own-products-11568645345 [https://perma.unl.edu/KM77-9NDX].
66. See, e.g., Olivia Solon, As Tech Companies Get Richer, Is It ‘Game Over’ for Star-tups?, THE GUARDIAN (Oct. 20, 2017), https://www.theguardian.com/technology/
2017/oct/20/tech-startups-facebook-amazon-google-apple [https://perma.unl.edu/ SHZ2-7BHA] (quoting a source as stating that new startups “are not getting funded because Amazon might one day compete with them”).
67. Letter from Jeff Bezos, Founder and Chief Executive Officer, Amazon.com, Inc., to Shareholders of Amazon.com, Inc. 1 (Apr. 11, 2019), https://ir.aboutamazon .com/static-files/4f64d0cd-12f2-4d6c-952e-bbed15ab1082 [https://perma.unl.edu/ 8GCC-T2CF].
nent areas (like the top of search results) were no longer devoted solely to Amazon private-label products.68
4. Social Media
Facebook is primarily a social media platform where users connect to their friends and family. However, Facebook is also integrated into various adjacent services, such as local buy-and-sell, video streaming and job listings. Facebook also facilitates the development of third-party applications that are built around the Facebook platform and integrated with it to various degrees. Facebook makes its “Graph” API available to software developers, which enables them to access an ar-ray of user-data once users authenticate using their Facebook login details.69 This expands the range of complementary software products that can be built around the Facebook ecosystem.
However, Facebook has been accused of excluding some third par-ties from distributing software applications that rely on Facebook’s data because “Facebook was looking to offer replica services itself.”70 In one instance, Facebook shut off API access to a developer whose application scanned users’ photos for bikinis.71 There is an obvious economic justification for this, namely that facilitating the production of such an invasive application would reduce the value of the Facebook platform due to users’ negative reactions and privacy concerns.72 Sim-ilarly, in December 2018 it came to light that Mark Zuckerberg, Facebook’s founder and CEO, personally approved blocking the access of Vine (owned by Twitter) to data that enabled it to provide a friend-finding feature in its video app.73 Ironically, Twitter has itself been accused of similar practices. For example, the company raised
con-68. Eugene Kim, Amazon Quietly Removes Promotional Spots that Gave Special Treatment to Its Own Products as Scrutiny of Tech Giants Grows, CNBC (Apr. 3, 2019), https://www.cnbc.com/2019/04/03/amazon-removes-special-promo-spots-for-private-label-products.html [https://perma.unl.edu/5P2H-J7SN].
69. Graph API, FACEBOOK, https://developers.facebook.com/docs/graph-api [https://
perma.unl.edu/Y8BW-K2G9] (last visited Aug. 29, 2019).
70. Lina M. Khan (@linamkhan), Twitter (June 6, 2018, 1:25PM), https://twitter.com/ linamkhan/status/1004428988851335168 [https://perma.unl.edu/FPR4-QG5N]. 71. See Kurt Wagner, Here’s Why an App for Finding Bikini Pics Is Facebook’s Latest
Headache, VOX RECODE(Nov. 29, 2018), https://www.recode.net/2018/11/29/18118
369/facebook-six4three-lawsuit-explained-pikinis-sealed-documents [https://per ma.unl.edu/V5JU-QRJN].
72. On platform owners’ need to regulate bad behaviour within platform ecosystems,
seeEvans, supra note 51, at 1201.
73. Adi Robertson, Mark Zuckerberg Personally Approved Cutting off Vine’s Friend-Finding Feature, THE VERGE(Dec. 5, 2018), https://www.theverge.com/2018/12/5/
18127202/mark-zuckerberg-facebook-vine-friends-api-block-parliament-docu ments [https://perma.unl.edu/2Q43-UQYQ] (last visited June 29, 2019). Accord-ing to documents seized by a UK parliamentary committee, a Facebook executive wrote to other senior management personnel, “Twitter launched Vine today, which lets you shoot multiple short video segments to make one single, 6-second
cerns among developers in 2015 when it shut off API access to Meer-kat, a livestreaming application, shortly after Twitter acquired Periscope, a rival company.74 Earlier, in 2012, Twitter shut off the access of Instagram (now owned by Facebook) to Twitter’s own friends-related API.75
In July 2019, Facebook revealed in regulatory filings that it had become the subject of an antitrust investigation by the FTC in June 2019; as yet, the specific allegations are unknown.76
Separately, Facebook has been accused of “appropriating” function-ality from competitors. For example, it produced an alternative to SnapChat’s “Stories” feature and bundled it with Facebook, Facebook Messenger, and Instagram.77 However, this conduct does not fit neatly into our framework of a vertically integrated platform privileg-ing its downstream offerprivileg-ing over those of its rivals withinthe platform environment. This debate falls properly within the realm of the appro-priate limits of intellectual property law (which, though a facet of wider competition policy, is an entirely different beast).
This section has shown that there is a growing debate about the activities of platform owners such as GAFA in lines of business that are ancillary to their core offerings. It has exemplified these concerns by reference to real-life examples. Different stakeholders take dramat-ically different stances on these issues, as we shall see. This includes
video . . . Unless anyone raises objections, we will shut down their friends API access today,” to which Zuckerberg responded, “Yup, go for it.”
74. Seth Fiegerman, Twitter’s Meerkat Crackdown Reignites Concerns Among Devel-opers, MASHABLE (Mar. 16, 2015),
https://mashable.com/2015/03/16/twitter-devel-opers-meerkat-sxsw/?europe=true [https://perma.unl.edu/QM24-3F4F] (last visited Aug. 29, 2019).
75. Adi Robertson, Twitter Blocks Instagram From Using its API for Friend-Finding Feature, THE VERGE (July 26, 2012), https://www.theverge.com/2012/7/26/
3189340/twitter-blocks-instagram-friend-finding-api [https://perma.unl.edu/ HC6Q-CNX6] (last visited Aug. 29, 2019).
76. Facebook Reports Second Quarter 2019 Results, FACEBOOK (July 24, 2019), https:/
/s21.q4cdn.com/399680738/files/doc_financials/2019/Q2/FB-Q2-2019-Earnings-Release.pdf [https://perma.unl.edu/789V-6WBJ]. According to one report, the al-legations concern Facebook’s acquisition strategy. See Brent Kendall, John D. McKinnon & Deepa Seetharaman, FTC Antitrust Probe of Facebook Scrutinizes Its Acquisitions, WALL ST. J. (Aug. 1, 2019),
https://www.wsj.com/articles/ftc-anti-trust-probe-of-facebook-scrutinizes-its-acquisitions-11564683965 [https://perma .unl.edu/FN4Z-WV9A].
77. Interview by Joe Nocera with Hal Singer, Managing Director at Econ One Re-search and Adjunct Professor at McDonough School of Business, Georgetown University (Mar. 22, 2019), https://www.washingtonpost.com/business/on-small- business/how-to-fix-big-tech-without-breaking-it-up/2019/03/22/bc19eeee-4ca6-11e9-8cfc-2c5d0999c21e_story.html [https://perma.unl.edu/V6T4-52QV] (“[Facebook] go around and figure out what you do outside of Facebook, and if you spend too much time outside, they have their engineers copy the functionality of an independent app and bring it into the mothership. Snapchat is the classic example.”).
those who believe that antitrust law, as influenced by the Chicago School’s consumer welfare framework, is perfectly capable of tackling anti-competitive leverage in the digital economy. The next Part exam-ines the treatment of adjacent market entry and leveraging in anti-trust law.
III. LEVERAGING IN ANTITRUST LAW
A. The Historical Origins of the Leverage Doctrine
In the first half of the twentieth century, antitrust law was over-whelmingly opposed to both vertical integration and leveraging con-duct (which, as discussed in the Introcon-duction, are distinct phenomena). As Professor Herbert Hovenkamp points out, antago-nism towards vertical integration rose from “the Great Depression, which bankrupted thousands of small unintegrated firms and pro-duced a political firestorm of campaigning against vertically inte-grated enterprises such as chain stores.”78 By the late 1930s and 1940s, vertical integration was seen as “inherently monopolistic.”79 In an infamous 1962 decision, the Supreme Court blocked a vertical merger where neither firm had a market share sufficient to demon-strate market power.80 In the Court’s reasoning, the leverage doctrine took center stage. The Court held that
[t]he primary vice of a vertical merger or other arrangement tying a customer to a suppler is that, by foreclosing the competitors of either party from a seg-ment of the market otherwise open to them, the arrangeseg-ment may act as a ‘clog on competition,’ which ‘deprive[s] . . . rivals of a fair opportunity to compete.’81
This tendency to conflate adjacent market entry with the ability and incentive to engage in anti-competitive leverage is important, not least because the idea that vertically integrated firms will, without more, have the ability and incentive to leverage anti-competitively is the central hypothesis underpinning Neo-Brandeisians’ proposal to block adjacent market entry by digital platform owners.
Leverage as a theory of abuse of monopoly power, though originally founded in patent law,82 was first applied in an antitrust setting by
78. See Herbert Hovenkamp, Robert Bork and Vertical Integration: Leverage, Foreclo-sure, and Efficiency, 79 ANTITRUST L.J. 983, 988 (2014).
79. Id. at 989.
80. Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962). 81. Id. at 323–24 (citations omitted).
82. SeeHenry v. A.B. Dick Co., 224 U.S. 1, 53 (1912) (White, C.J., dissenting) (hold-ing that a patentee of a machine that fastened buttons onto shoe-holders should be prohibited from selling the machine on the condition that purchasers also buy the patentee’s wire for the machine, because it would enable the patentee “to extend his patent rights so as to bring within the claims of his patent things which are not embraced therein” and thereby “multiply monopolies”); Motion Pic-ture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 517–18 (1917) (holding
Justice Louis Brandeis in the 1931 judgment of Carbice Corp. of Am. v. Patents Dev. Corp.83 The defendant, which held a patent over a re-frigeration container, compelled purchasers of its container to also buy its unpatented dry ice. Giving the majority opinion, Justice Brandeis held that such licensing restrictions “were beyond the legitimate scope of [the patentee’s] monopoly” and thus were illegal under the patent misuse doctrine.84 Justice Brandeis also held, albeit obiter, that the conduct constituted “a direct violation of the Anti-Trust Acts.”85 In subsequent antitrust cases, the Supreme Court applied the leverage doctrine in its ratio decidendi. In 1936, in Int’l Bus. Machs. v. United States, IBM tied86 the purchase of its business machines to the sale of punch cards.87 The Supreme Court condemned the arrangement, holding that it served to “create a monopoly in the production and sale of tabulating cards suitable for [IBM’s] machines.”88 In 1947, in Int’l
Salt Co. v. United States, the Supreme Court found that that the tying of unpatented salt to patented salt machines constituted violations of § 1 Sherman Act and § 3 Clayton Act.89 Justice Jackson, in his major-ity opinion, held that the legal “limited monopoly” inherent in the pat-ents conferred “no right to restrain use of, or trade in, unpatented salt.”90 The effect of the tying arrangement was to “close [the] market for salt against competition,” which constituted “a restraint of trade for which [the patentee’s] patents afford[ed] no immunity from the anti-trust laws.”91 Two years later, in 1949, the Supreme Court fa-mously decreed that “tying agreements serve hardly any purpose
be-that exploiting market power to force the sale of unpatented products would en-able the patentee to “create a monopoly in the [adjacent market] wholly outside of the patent in suit and of the patent law as we have interpreted it.”). Professor Herbert Hovenkamp traces the leverage doctrine in patent law back to the case of
Bloomer v. Millinger, 68 U.S. 340, 350 (1863). See Hovenkamp, supranote 78, at 992 (“The [leverage] idea originated in nineteenth century decisions developing the ‘first sale,’ or patent exhaustion doctrine, which postulated that by imposing restraints on a patented good after it was sold, a patent holder could leverage its position to extract revenues beyond what the Patent Act authorized. In its 1863 decisionBloomer v. Millinger, the Supreme Court held that patentees ‘are enti-tled to but one royalty for a patented machine.’ This ‘double royalty’ or ‘leverag-ing’ critique has been a prominent part of first sale jurisprudence ever since.”). 83. Carbice Corp. v. Patents Dev. Corp., 283 U.S. 27 (1931).
84. Id. at 31–32. 85. Id.at 34 n.4.
86. A tying arrangement, or tie-in sale, can be defined as “an agreement by a party to sell one product but only on the condition that the buyer also purchases a differ-ent (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5–6 (1958). 87. Int’l Bus. Machs. Corp. v. United States, 298 U.S. 131 (1936).
88. Id. at 136.
89. Int’l Salt Co. v. United States, 332 U.S. 392 (1947). 90. Id. at 395–96.
yond the suppression of competition.”92 For the Court, the “essence of illegality in tying agreements [was] the wielding of monopolistic leverage.”93
The Supreme Court zealously applied the leverage doctrine throughout the twentieth century, holding that tying arrangements wereper se illegal with scant room for business justification. In Fort-ner Enters., Inc. v. United States Steel Corp., for example, the Su-preme Court held that tying arrangements “deny competitors free access to the market for the tied product not because the party impos-ing the tyimpos-ing requirements has a better product or a lower price, but because of his power or leverage in another market.”94 This reveals an inherent presumption in the leverage doctrine that there were no pro-competitive motivations for tying arrangements. Prominent antitrust scholars agreed with the premise of the leverage doctrine, concluding that “tying tends to spread market power into markets where it would not otherwise exist.”95 Indeed, the intuition is easy to grasp and at-tractive to swallow: naturally, “two monopolies are better than one.”96
B. The Chicago Critique of the Leverage Doctrine
It was not until the 1950s that scholars in law and economics asso-ciated with the University of Chicago started to question the veracity of the leverage doctrine and the per se illegality of tying, vertical merg-ers, and other leveraging behavior.97 Perhaps the most famous Chi-cago insight was the idea that a monopolist could not earn additional monopoly profits in an adjacent market by leveraging into it (the “sin-gle monopoly profit theorem”). Take the markets for Product A (mo-nopolized) and Product B (perfectly competitive). Chicago scholars pointed out that the monopolist is already charging a profit-maximiz-ing price for Product A. If the monopolist ties Products A and B to-gether, assuming that Products A and B are used in fixed proportions, the consumer would regard any increase in the price of Product B
92. Standard Oil Co. v. United States, 337 U.S. 293, 305 (1949); see also Int’l Salt, 332 U.S. at 396 (“[T]he tendency of the [tying] arrangement to accomplishment of monopoly seems obvious.”).
93. Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 611 (1953).
94. See, e.g., Fortner Enters., Inc. v. United States Steel Corp., 394 U.S. 495, 498–99 (1969) (emphasis added).
95. CARL KAYSEN & DONALD F. TURNER, ANTITRUST POLICY: AN ECONOMIC AND LEGAL
ANALYSIS 157 (1965).
96. RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 174 n.8 (1976).
97. Aaron Director is often credited as the original proponent of the Chicago critique, and numerous subsequent critics were students of Director at the University of Chicago Law School. Id. at 173. Director’s only published reference to his critique of leverage appears in Aaron Director & Edward H. Levi, Law and the Future: Trade Regulation, 51 NW. U. L. REV. 281 (1956). However, scholars have pointed
out that the Chicago critique was understood years prior to its wider dissemina-tion.See, e.g., Kaplow, supra note 5, at 518 n.12.
above the competitive level as an increase in the entire package, and thus demand and profits would fall below the monopolist’s optimal level.98 The monopolist therefore has no incentive to leverage into the market for Product B in order to make that market less competitive.99 Chicago scholars applied this theorem to undermine antitrust law’s hostility towards both vertical integration and leveraging behavior, such as tying arrangements.100
Instead, as the Chicago scholars pointed out, vertical integration and leveraging conduct are predominantly motivated by efficiency, re-sulting in higher quality or lower prices than prevail if, in the case of vertical integration, two firms enter into a contract, or, in the case of leveraging, the primary good is combined with a third-party comple-mentary good. Chicagoans’ central criticism of Supreme Court case law was that the conduct concerned should in fact be legal, even if it excludes competitors in the adjacent market, because consumers ben-efit from the introduction of product improvements and lower prices.101 It is not the goal of antitrust law to protect less efficient producers of the adjacent good from the natural forces of competition, even if it means that an existing monopolist becomes a monopolist over another product too. Such a tolerance for unregulated private mo-nopoly in circumstances where technical considerations, such as supe-rior efficiency, can elevate successful firms to monopoly status can be traced through to the neoliberal policy prescriptions of the University of Chicago’s wider economics and policy scholars, such as Milton
98. Bowman, supra note 6, at 23 (“Where fixed proportions are involved, no revenue can be derived from setting a higher price for the tied product which could not have been made by setting the optimum price for the tying product.”).
99. SeePOSNER, supra note 96, at 173 (explaining that the leverage theory fails to
“explain why a firm with a monopoly of one product would want to monopolize complementary products as well.”).
100. ROBERT H. BORK, THE ANTITRUSTPARADOX 373 (2d ed. 1993) (“The tying
arrange-ment, whatever else it may accomplish, is obviously not a means of gaining two monopoly profits from a single monopoly.”). In the vertical integration context, Bork argued that, “[i]f, for example, a firm operates at both the manufacturing and retailing levels of an industry, it maximizes overall profit by setting the out-put at each level as though the units were independent of one another . . . The firm will not, as is frequently suggested, sell to its own retail subsidiary for less than it sells to outsiders, unless the efficiencies of integration lower the cost of selling to its own retail unit.” Id.at 228.
101. Chicago scholars also pointed out that, when tied products are used in variable proportions, tying enables the dominant firm to price discriminate by metering consumption of the tied product. SeePOSNER,supra note 96, at 173–74. As Bork
explained, in criticizing International Business Machines, purchasers of IBM’s machines were in fact “paying for the machines in the price of the cards.” Because “heavy users are generally willing to pay more than those whose use is less inten-sive,” IBM could reduce the price of its machines and increase the price of the tied cards, such that each customer had to “pay a price for the machine in direct pro-portion to his use of it.” This maximized IBM’s profits through price discrimina-tion.See BORK,supra note 100, at 377.
